Advertising and Risk Selection in Health Insurance Markets

Abstract

This paper studies the impact of advertising as a channel for risk selection in Medicare Advantage.
We provide evidence that insurer advertising is responsive to the gains from risk selection. Then we
develop and estimate an equilibrium model of Medicare Advantage with advertising, allowing rich individual
heterogeneity. Our estimates show that advertising is effective in attracting healthy individuals
who are newly eligible for Medicare, contributing to advantageous selection into Medicare Advantage.
Moreover, risk selection through advertising substantially lowers premiums by improving insurers’ risk
pools. The distributional implication is that unhealthy consumers may be better off through cross-subsidization
from healthy individuals.